Federal Budget Policy and Defense Strategy

SUMMARY

The debate over future U.S. defense strategy is not easily separated from misunderstandings and confusion about Federal budget policy. In particular, some defense analysts now contend that the capabilities required under the 1993 Department of Defense Bottom-Up Review are too costly. The deficit control efforts that appear certain to constrain Federal spending for an indefinite period, they argue, mandate a less demanding and less expensive strategic option.

The realities of budget policy trends, however, are more complex than this argument acknowledges. The structural deficit problem that policymakers are struggling to solve has, in fact, very little to do with discretionary spending, whether for defense or for nondefense programs. Instead, the key to serious deficit reduction is found in entitlement policy cutbacks, primarily in retirement and health programs. Unless the extremely high rates of growth embedded in existing entitlements are dramatically reduced, structural deficits cannot be controlled.

Over the past three decades, the budgetary and economic significance of defense budgets has greatly diminished. Today, the Federal budget is dominated by mandatory spending programs, primarily entitlements, and these programs will absorb even larger shares of future budgets. Thus, strategic compromises that reduce defense budget requirements cannot have more than a marginal impact on deficit control. The damage to important, enduring military capabilities, however, could be extremely serious and, given the declining flexibility in spending policy, difficult to reverse. The purpose of this monograph, then, is to provide an accurate fiscal perspective for a critically important strategic policy debate.

INTRODUCTION

It is neither unexpected nor unprecedented that the debate over U.S. defense policy is being dominated by fiscal constraints. Maintaining an acceptable balance between budgetary and strategic considerations was difficult during the Cold War, when the geopolitical environment and concomitant threats to U.S. interests were reasonably predictable.1 The contrasting uncertainties of the post-Cold War era obviously complicate the already formidable task of shaping a strategic consensus that will not be compromised by nondefense budgetary pressures.

The Department of Defense's Bottom-Up Review (BUR), which was made public on September 1, 1993, defines future U.S. defense strategy and requirements. 2Criticism of its strategic assumptions and especially its potential costs is beginning to escalate in conjunction with the rising tensions between the executive branch and the Congress over Federal budget policy. Perhaps the most important strategic controversy at hand focuses on the BUR's assumption that U.S. forces must have the capabilities to conduct two "major regional conflicts" at roughly the same time. For many defense experts, the likelihood is remote that these capabilities would ever be needed, and there is related uncertainty about the less abstract issue of whether currently planned forces would be able to support so robust a strategy.3

These strategic issues cannot be easily separated from the fiscal limits being imposed on defense. Assuming that planned forces can adequately support official strategy, can projected budgets maintain these forces at prudent levels of readiness and modernization? Here, the overwhelming consensus is that funding will prove to be inadequate, although the size and seriousness of budgetary shortfalls are disputed.4

The purpose of this analysis is to clarify the budgetary context within which defense funding is determined, so that the strategic policy debate can proceed in a more informed and rational manner. Federal budget policy is likely to undergo a profound transformation, if the executive branch and the Congress succeed in balancing the budget over the next decade. As this transformation evolves, defense spending will become increasingly vulnerable to deficit-reduction initiatives, thereby enhancing the appeal of less challenging and less costly strategic options.5

There is, then, a distinct danger that budgetary pressures will force strategic compromises and risks that are unwise and, in fact, unnecessary. The inescapable reality, from the standpoint of budget policy, is that defense spending cutbacks can contribute very little to the Herculean tasks of bringing the budget into balance and, thereafter, keeping it in balance. The "drivers" of past, current, and future deficits are Federal health and retirement entitlements, whose growth rates under current policy are not sustainable, even if draconian reductions are imposed on other types of spending. It is simply not feasible for defense or nondefense discretionary programs to yield savings that will appreciably alter the long-term deficit dynamic associated with entitlement spending growth.

Indeed, what seems likely to occur if defense strategy is scaled down solely in order to reduce defense budget demands over the next decade is that defense will find itself in precisely the same predicament thereafter. Eliminating structural budget deficits will require large and repeated downward adjustments in spending policy for the foreseeable future. But until Federal entitlement policy is fundamentally changed, defense will be facing a recurring sequence of budget-driven strategic accommodations.

The defense policy debate should proceed from a clear understanding of nondefense budget policy trends. The first element in this understanding is retrospective--how defense budgets have affected spending control and deficit growth over the past several decades. The second element involves the relationship between the defense and nondefense discretionary spending limits imposed during the 1990s and the structural deficit reductions achieved during this period. The third element is a prospective examination of the long-term budget trends that create structural deficit problems and of the spending policy reductions upon which budget balance ultimately depends.

By assessing defense funding within this analytical framework, it should be possible to divorce, or at least to insulate, the critically important strategic debate from misperceptions and confusion about the Federal budget. In the end, defense planners may determine that existing strategy is unnecessarily demanding. This decision, however, should proceed from a rigorous analysis of risk and reversibility, rather than from politically expedient efforts to gain short-sighted and evanescent savings.

CONCLUSION

The Federal budget's problems yield no easy solutions. Whether the budget is actually balanced by 2002 or 2005, or structural deficits merely reduced, the entitlement programs that the Federal Government has established will leave less and less room to fund other programs. The longer the delay in controlling long-term entitlement growth, the greater will be the cost in essential government functions, and especially in defense.

There are, of course, various proposals for less demanding and less costly military strategies, but many of these display a curious naivete about budget policy.62 A recent Brookings Institution study, for example, calls for abandoning simultaneous regional war capabilities and cutting back on supporting "force structure, operations, and weapons acquisition policy," in order to achieve defense savings of $20 billion annually by the end of the decade.63 The United States would have to relinquish a "certain amount of its overwhelming advantage," but the sacrifice actually would be modest--only "about half of defense's ?fair share' contribution toward balancing the overall Federal budget by 2002 . . ."64 One would assume that a "fair share" argument would take into account the defense budget's prior, unique contributions to deficit control over the past 30 years, but the more serious shortcoming of the Brookings study is the failure to acknowledge that its reduced defense levels (or any of the other so-called "moderate options") cannot be maintained unless an adequate margin for discretionary spending is preserved.

Defense can, in fact, be supported at adequate levels under existing strategy, without abandoning balanced budgets or other desirable goals. Existing underfunding gaps can be closed, over the short term, by preventing downward adjustments in revenue policy and subsequently by the timely implementation of entitlement reforms. Before a reasonably coherent military strategy, and its supporting capabilities, is discarded for admittedly riskier alternatives, these budgetary tradeoffs should be carefully weighed.

The necessity for a decidedly prudent approach to defense planning is underscored by the fact that, 10 or 15 years from now, the Federal budget will have even less flexibility, because so much spending will be absorbed by mandatory entitlements and interest payments. The budget policy reversals that helped to fund defense buildups during World War II, Korea, and, to a lesser extent, the 1980s, will not be possible with such narrow discretionary spending margins. If policymakers today acquiesce to riskier defense capabilities, they will simply be exacerbating the potential problems arising from diminished budget reversibility. In effect, somewhat higher levels of risk can be tolerated if future budgets can readily accommodate required buildups. But when budget reversibility is already low, and certain to diminish still further, the risk associated with planned capabilities should be minimized.

During the Cold War, Presidents Truman, Eisenhower, and Reagan fought to protect the nation's strategic interests against competing budgetary needs. A post-Cold War defense strategy, now in its nascent stage, faces the same competition. The Bush and Clinton administrations, along with Democratic- and Republican-controlled Congresses, have firmly endorsed current strategy. It is now incumbent on political leadership, especially in the executive branch, to extend this strategic consensus to the debate on Federal budget policy.

ENDNOTES

1. Complaints about the subordination of strategic policy debates and oversight to budgetary decisionmaking are long-standing, particularly, but not exclusively, among congressional analysts. See, for example, Barry M. Blechman, The Politics of National Security, Congress and U.S. Defense Policy, New York: Oxford University Press, 1990, pp. 23-43; Paul Stockton, "Beyond Micromanagement: Congressional Budgeting for a Post-Cold War Military," Political Science Quarterly, Vol. 110, Summer 1995, pp. 233-259.

2. The Clinton
administration's first National Security Strategy Report, of which the
Bottom-Up-Review was a major component, was not published until June 1994. For a concise evaluation of its formulation and content, see Don M. Snider, The National Security Strategy: Documenting Strategic Vision, Carlisle Barracks, PA: U.S. Army War College, Strategic Studies Institute, 1995, pp. 10-14.

3. National Journal, Vol. 26, September 17, 1994, pp. 2126-2130.

4. The range of estimates here is enormous. The Clinton administration has acknowledged short-term multi-year funding inadequacies of approximately $50 billion. Its December 1994 Defense Funding Initiative added over $25 billion to FY 1996-2001 defense budget authority planning levels in order to reduce the shortfall, with the remainder to be addressed through program changes and reductions and through revised economic assumptions. The Congressional Budget Office and the General Accounting Office have estimated underfunding of the BUR at $50-$150 billion for the Department of Defense's FY 1996-2001 Future Years Defense Program. The largest gap, $253 billion over 5 years, has been jointly reported by the Center for Strategic and International Studies and the Strategic Planning Corporation, Defense News, January 30-February 5, 1995, p. 12.

5. As one recent study stated, part of the justification for "a significantly different strategic rationale" is "simple frugality . . . less expensive ways to pursue the goals of deterring regional war, conducting global military deployments, and enhancing nuclear safety." Michael O'Hanlon, Defense Planning for the Late 1990s, Washington: The Brookings Institution, 1995, p. 5.

62. For a listing of several recent proposals, see O'Hanlon, Defense Planning for the Late 1990s, p. 33. The "Aspin options" are examined in Dennis S. Ippolito, Budget Policy and the Future of Defense, Washington: Institute for National Strategic Studies/National Defense University Press, 1994, pp. 84-97.